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Current Legislative Proposals for Patent Reform

Last updated 12/09/13

There have been many recent proposals on the Federal level (and even the state level) to reform the patent system and fight patent trolls. Many of the fixes are promising, though most focus on specific broken aspects of the system without addressing the larger issue that is causing the bulk of the troll problem: the flood of overbroad, low-quality software patents. Check out our own proposals for legislative reform, or our broader ideas for patent reform at our Defend Innovation homepage.

Congress

SHIELD Act (HR 6245)

Reps. Peter DeFazio (D-OR) and Jason Chaffetz (D-UT)

The SHIELD Act, or the Saving High-Tech Innovators from Egregious Legal Disputes Act (H.R. 845), is designed to help the innocent victims of patent trolls by creating a "fee shifting" system.

Patent trolls use the sky-high cost of litigation as a weapon. It costs millions to defend a patent lawsuit. So while a few targets have fought back and won, even large companies are understandably reluctant to spend a fortune and waste employee time fighting a lawsuit. And smaller companies, like start-ups, might not have the resources to defend a patent suit at all. So even if the troll's claims are weak, it can pressure its victims into settlement.

The SHIELD Act would help fix this problem. Under this proposal, if the patent troll loses in court (because the patent is found to be invalid or there is no infringement), then it pays the other side's costs and legal fees. (The party would even have to post bond beforehand—a strong deterrent for trolls.) We think this proposal—which is also one of the reforms proposed at our Defend Innovation project—is a great first step in the fight against patent trolls.

End Anonymous Patents Act (HR 2024)

Rep. Ted Deutch (D-FL)

The End Anonymous Patents Act (H.R. 2024, PDF) sets out to solve the "Who Owns What" problem: we currently don't have an effective way of confirming who owns a particular patent, nor do we know what patents a particular person or company owns. A combination of poor record-keeping infrastructure and practices, as well as scheming businesses that transfer patent ownership to shell companies, has resulted in a hazy patent system where the lack of transparency has become a competitive tool.

The law already requires parties to file notice when a patent's ownership is transferred at the Patent Office, but this bill would put real teeth in these provisions (which are often ignored) by making sure a patentee cannot collect damages if they had failed to meet this requirement. The term "real party in interest" means the person or entity that would benefit from a lawsuit; this bill would require real parties in interest to be disclosed to the Patent Office, including disclosure of "any entity that has the legal right to enforce the patent through an infringement action." Patent trolls often hide behind shell companies, and this shell game allows parties who benefit from settlements and licenses to remain secret. Such companies have the ability to hide until an infringement case passes their way.

This doesn't make any sense. The patent system relies on what's known as the "patent bargain," an exchange of exclusive rights for an invention in exchange for public disclosure about the invention. This stems straight from the Constitution, which gives the government the ability to "promote the progress of science and useful arts" while also securing rights for inventors. Navigating the current patent system in a way that actually promotes progress requires an awareness of the competitive landscape. But right now, knowing who owns what is far from easy. All of this patent subterfuge—coupled with a system that promotes such schemes—has created a state of play where litigation is favored over competition.

EFF's Defend Innovation campaign features a separate fix that includes the disclosure of not only patent ownership records but also licenses (barring relevant trade secrets). That being said, Rep. Deutch's End Anonymous Patents bill provides a necessary step towards transparency in the patent system.

Patent Quality Improvement Act (S 866)

Sen. Chuck Schumer (D-NY)

Senators Schumer and Jon Kyl had previously introduced a temporary provision in the America Invents Act to address the issue of challenging particular patents. Known as the transitional program for covered business method patents, or Section 18, this provision allows anyone threatened with infringement suits over certain types of patents to petition the PTO to review the patent's grant and scope. Importantly, the Schumer-Kyl provision lets courts stay ongoing litigation when a party institutes a challenge at the PTO. This procedure steamlines challenges to patents of dubious quality because it is cheaper and more efficient than litigation. But it has two major flaws: 1) it is limited to patents covering methods of doing business in a financial or commercial setting (such as a patent on hedging risk), and 2) the provision is temporary and is set to expire in 2020.

Sen. Schumer's new bill (S 866)amends the AIA provision. The new legislation makes the covered business method patent provision permanent and also expands its language beyond simply financial products or services, applying it essentially to all business method patents—and, thus, to all software patents.

Ideally, we want this ability to challenge bad patents to be extended to everybody and not just those threatened with suit (many other types of reexams are available to all third parties, and we believe this one should be, too). Third-party requests for reexamination serve as an important check on the PTO, which often issues overly broad patents that are harmful to the public. To be sure, patent examiners must look at many applications every year, covering all types of technology. Given that they spend an average of only 18 hours per application, it is very hard for the examiners to find the best prior art to invalidate the patents. This is precisely why we all benefit when third parties—who often know more about the technology at issue than the examiners—get involved in the process.

Patent Abuse Reduction Act (S 1013)

Sen. John Cornyn (R-TX)

This bill (S 1013) would do significant harm to the patent troll business model, making it harder to be a troll and easier to fight one in court. Patent trolls have long taken advantage of the fact that patent litigation is expensive (costing into the millions of dollars) and can take years, draining companies of resources. Patent trolls are in the very business of litigation and deploy a variety of techniques (shell companies and contingency fee arrangements, for example) to keep their own costs much lower.

The proposed legislation would level this playing field by incorporating one of our favorite reforms, fee shifting. This means that if a party accused of infringing a patent actually fights back in court and wins, the troll could be on the hook. (Unfortunately, the legislation doesn't require the suing party to post a bond—an important tool for deterring patent trolls.) The bill also includes provisions limiting the type and amount of discovery a troll can get and what kind of information a troll needs to disclose at the outset of a lawsuit. The latter is particularly promising because it would force patent trolls to do true due diligence before they sue and to name who is really behind the lawsuit (information that is currently quite difficult to find). These provisions make the troll's case more expensive and takes away another of its favorite tools—secrecy.

These reforms are all litigation focused and, thus, are limited. We believe the problem is much bigger. The bill does not address patent quality and fails to consider what the Patent Office could do to help those facing lawsuit threats. It does not include protection for end users, consumers and small businesses attacked by patent trolls over widely available technologies.

Patent Litigation and Innovation Act (HR 2639)

Rep. Blake Farenthold (R-TX) and Rep. Hakeem Jeffries (D-NY)

This bill (PDF) includes many of the types of reforms we've been talking about, such as:

Heightened pleading: Requiring patent holders to explicitly make its case when it files by specifying which patents and claims are at issue, as well as exactly what products allegedly infringe and how. It also requires patent holders to remove the veil of secrecy and specifically identify who is behind the action—not just the patent's owner, but everyone who stands to financially benefit. This kind of transparency is long overdue, and we are encouraged to see it in the proposal.

Protection of end users: Allowing an "interested party"—such as the manufacturer or supplier of equipment—to intervene on behalf of its customers. More importantly, upon request, any underlying case against the customer would be stayed, essentially put on hold, until the "interested party" finished its case. While this type of protection is good for small businesses and consumers, we wish the bill would go further and create immunity for end users who use off-the-shelf technologies; there is no reason a consumer should find herself facing any kind of liability for using commonly available technology for its intended purpose.

Stay of discovery: Shutting down expensive and often harassing discovery until the court has ruled on certain motions, such as a motion to dismiss. This is important because it gives defendants a powerful tool to dispose of cases early before the legal fees and court costs really add up.

Sanctions for abusive litigation: Requiring courts to include a record of each party's compliance with the rules of litigation. Currently, Rule 11 of the Federal Rules of Civil Procedure requires that parties behave appropriately during litigation—the provision in this bill would require the court to make relevant findings even if neither party asserted a violation of that rule. Presumably, this is intended to limit bad-faith lawsuits; we think a fee-shifting provision like the SHIELD Act would be a more effective tool to do the same thing.

STOP Act (HR 2766)

Rep. Darrell Issa (R-CA) and Rep. Judy Chu (D-CA)

The Stopping the Offensive Use of Patents (STOP) Act, is, in part, a companion to the Schumer bill. This proposal would, like its Senate counterpart, expand an important avenue to challenge a patent's validity at the Patent Office. A couple of things make this type of challenge particularly helpful: 1) it gives parties additional arguments to show a patent's invalidity that couldn't be made at the Patent Office previously; and 2) when instituted, it stays any litigation proceeding between the same parties in court. (Currently, courts have discretion over whether to decide to stay cases—discretion that results in nconsistent results.)

The STOP Act also includes a provision requiring the Patent Office to expand access to pro bono legal services to "under-resourced re-sellers, users, implementers, distributors, or custormers of an allegedly infringing product or process." Of course, we would rather these parties not find themselves facing patent litigation at all; to the extent they are, the process should be as painless as possible. Increased access to pro bono legal services is an important element to make that happen.

Heightened Pleading: Requiring a patent holder to provide basic details (such as which patents and claims are at issue, as well as exactly what products allegedly infringe and how) when it files a lawsuit.

Fee shifting: Requiring the loser in a patent case to pay attorney’s fees and costs. This would make it harder for trolls to use the extraordinary expense of patent litigation to force a settlement.

Transparency: The draft includes strong language requiring patent trolls to reveal the parties that would actually benefit from the litigation (called the real party in interest).

Joinder: If the plaintiff is a shell-company patent troll, the defendant could require the real party in interest to join the litigation. Even better, a prevailing defendant could collect attorney’s fees from the real party in interest if the patent troll can’t or won't pay.

Staying customer suits: Requiring courts to stay patent litigation against customers when there is parallel litigation against the manufacturer.

Discovery reform: Shutting down expensive and often harassing discovery until the court has interpreted the patent. This should make it easier for defendants to dispose of frivolous cases early before the legal fees and court costs really add up.

Post-grant review: The bill expands an important avenue to challenge a patent's validity at the Patent Office (known as the transitional program for covered business method patents). While this procedure is still too expensive for many of the trolls' smaller targets, we support efforts to make it easier to knock out bad patents. (Update: the CBM expansion was removed from the bill.)

Taken together, these reforms would make life much harder for patent trolls and make the world safer for true innovators.

The bill is not perfect. Ultimately, we need stronger reform to stop the disturbing trend of patent trolls picking on customers and end users. However, taken together, the bill will significantly reduce the threat of abusive patent trolls.

Patent Litigation Integrity Act (S 1612)

Sen. Orrin Hatch (R-UT)

The Patent Litigation Integrity Act is a fee-shifting bill. Fee shifting, often called "loser pays," allows a court to award a winning party costs and fees in certain cases. In patent litigation, this type of provision would help tilt the playing field slightly more in favor of the good guys. To understand, think about the patent troll business model: making broad claims of infringement based on patents of questionable validity is the troll's favorite move. It's no wonder that many defendants choose to pay up rather than take the time, energy, and especially the money to fight in court. Fee shifting would empower innovators to fight back, while discourging trolls from threatening lawsuits to start.

Even more, this bill would explicitly give courts the tools to require that the troll put up a bond at the outset of litigation. In other words, if the court thinks the party bringing a suit is a troll or otherwise has not brought a good claim, it can require that party to put aside the money it would need to cover the defendant's legal fees and costs at the end. Because trolls use shell companies with very few assets to sue, the bond requirement is an important one that would require patent trolls to put their money where their mouth is.

Fee shifting is common-sense legislation that would have a huge impact on stopping patent trolls, and for that we support Sen. Hatch's bill.

Patent Transparency and Improvements Act (S 1720)

Sen. Patrick Leahy (D-VT)

The Patent Transparency and Improvements Act is the Senate's main patent vehicle. Currently, it features reforms on patent ownership transparency, a customer stay, and bad-faith demand letters. It is currently being discussed, and a new version should be released soon.

White House

The White House announced that it was actively taking on the troll problem. The White House also announced the release of a new paper by the National Economic Council and the Council of Economic Advisers, called Patent Assertion and U.S. Innovation. The paper appreciates the real harm that comes from patent trolls and recognize the risk that low-quality patents represent when they end up in patent trolls' hands.

Not all of these reforms go as far as we'd like, but each takes on dangerous aspects of the patent troll business model. One glaring omission: a robust discussion about patent quality and the problem of vague, overbroad software patents. The flood of these low-quality software patents is at the root of this problem, and we cannot fully address the scourge of patent trolls without addressing those patents.

White House Executive Actions

Tighten functional claiming: requiring patent applicants to explain their inventions better and to limit those inventions to a specific way of accomplishing a task, as opposed to all ways of accomplishing a task. This is an important (and obvious) fix that should help stem the tide of overbroad software patents and increase patent quality.

Empower downstream users: ending the abuse associated with targeting end users, such as small businesses, startups, and even individuals who find themselves facing lawsuit threats and licensing demands for simply using everyday products. As the White House puts it: "End-users should not be subject to lawsuits for simply using a product as intended, and need an easier way to know their rights before entering into costly litigation or settlement." We couldn’t agree more.

Expand dedicated outreach and study: working with members of the community, including third-party stakeholders, to address flaws in the system. This would include increasing scholarly programs at the Patent Office, something that if done right could have a direct positive effect on patent quality by bringing in big thinkers to address systemic problems at that office.

Strengthen enforcement of exclusion orders: streamlining procedures for imported goods that are found to infringe U.S. patents.

the first four of these proposals are very encouraging. Some don't go far enough (we wish the White House called for broader immunity for end users facing lawsuits, for instance), but each would make the world better. (We have some concerns about granting the Executive Branch more power to enforce exclusion orders, especially given the abuse of power we’ve seen in the domain name seizures cases, but we await the proposal’s specifics.)

White House Legislative Proposals

Increase demand letter transparency: incentivizing public filing of demand letters in a way that makes them accessible and searchable to the public. Access to this information gives troll targets increased ability to fight back while removing much of the dangerous secrecy that the trolls currently operate behind.

Fix transparency: requiring patent owners to update records at the Patent Office as to a patent's real owner whenever they assert that patent, even if the threat is in the form of a demand letter. Again, taking away secrecy takes away one of the patent troll's favorite weapons. We're particularly encouraged to see the inclusion of demand-letter threats as a trigger for this requirement.

Protect end users: ending the abuse associated with targeting end users, such as small businesses, startups, and even individuals who find themselves facing lawsuit threats and licensing demands for simply using everyday products by giving those end users legal tools to slow down or even stay litigation.

Change International Trade Commission (ITC) standard for injunctive relief: making it harder for parties to keep whole products out of the U.S. market based on claims of infringement, particularly when that infringement only covers a fraction of a whole product or when removal from the market would not be in the consumers' best interest.

Ensure ITC has flexibility in hiring.

State Level

Vermont

Vermont is the first state taking patent trolling into its own hands. The Governor recently signed a bill to combat "bad faith assertions of patent infringement" (H.299, PDF).

This law requires patent demand letters to be specific about the claim being violated, to be particular about how the target is violating the patent, and to give targets a reasonable estimate of the damage costs coupled with a reasonable time to respond (patent trolls usually have broad demands, are vague about violations, and pressure their targets to respond hastily with their purses open). If a court finds a demand to be meritless or deceptive, they can swing down with full force and lay heavy fines on the bad actors, who are more than likely patent trolls.

This law could solve some of the patent troll problems in Vermont. Unfortunately, it raises some constitutional questions around preemption (the doctrine that federal law invalidates state law when they are in conflict) and federal due process (which generally protects the right to take cases to court or make demands when they're sent in good faith). Vermont lawyer Justin McCabe at Green Mountain IP has a good analysis of the law's pros and cons.

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